Stock indices plunge as risk-off returns

Summary:

• European stock markets fall to lowest level since 2016

• US500 falls beneath recent low of 2712

• Pound rises on positive backstop news

• Lira declines on possible breakdown of AKP’s alliance

• Top 3 charts this week: BRAComp, EURUSD, Gold

There’s a sea of red across indices today with stocks around the globe taking a hammering. The largest rally in almost 3 years in Chinese equities on Monday was all but entirely erased overnight and the selling has spread to Europe with the DE30 and EU50 both falling to levels not seen since 2016. There’s a clear risk-off mood to the price action with Gold surging to a 3-month high and the Japanese Yen the best performing currency in the FX space.

The US continues to hold up relatively well compared to its European and Asian peers but there are some clear warning signs afoot. For instance price has broken below the 200 day SMA in recent days and unlike the past few times this has occurred there hasn’t been much of a bounce. Before the past couple of weeks the market had only closed below the 200 day SMA on one occasion in the past 2 years (in early April) but barring a strong recovery today, it will be the 4th close below the SMA in just 9 sessions. A bear flag appears to have been possible broken to the downside and with price breaking below recent lows of 2712, the market has opened up the possibility of another large leg lower.

Given the heavy newsflow surrounding Brexit negotiations of late, the pound has held up pretty well with reports of a lack of progress on a future deal and even speculation of a vote of no confidence for PM Theresa May failing to cause a large sell-off. This relatively diminished sensitivity to perceived bad news could be seen as a good omen for sterling, with the logic behind this school of thought being that a failure to drop on bad news means that the currency could rise on any good, or even less bad, developments. On this front there’s been an interesting story out this afternoon which has caused a flurry of buying in the pound, although the gains have since been pared somewhat. Irish broadcaster RTE reported that the European Union was planning to offer a UK-wide customs union as a way to break the deadlock over the Irish border issue.

The Turkish lira has been by far the weakest EM currency today. Looking for reasons standing behind such underperformance one needs to point to a risk-off mode as well as adverse political reports from Turkey. Namely the TRY’s depreciations has sped up following the news regarding a possible breakdown of Erdogan’s alliance. The MHP leader informed that it is not going to cooperate with the Recep Erdogan’s AKP in local elections scheduled for March 31, 2019. Let us remind that the MHP has been the major coalition party. The Erdogan’s AKP sided with the MHP in the most recent general elections and both were expected to do the same in the local election next year. There is uncertain whether the two parties will end its alliance in the parliament as well. It needs to be said that the AKP will be stripped of a majority if the MHP leaves the coalition.

Our top 3 charts this week are the BRAComp, EURUSD and Gold. They can be viewed in more detail here.